Boeing's outsourcing strategy in the spotlight as FAA grounds the Dreamliner

In the wake of the FAA's decision to ground Boeing's snazzy 787 Dreamliner planes after a series of scary incidents, Boeing's decision to outsource the plane's parts to factories around the world is being questioned. It would be hard to overstate the scope of the outsourcing, which involved 50 suppliers and 135 sites, which had already caused the 787 to be released years behind schedule, and which may have contributed to problems now:

Fifty per cent of the Dreamliner is made from composite materials, including much of the fuselage and wings, which come from manufacturers in Japan, Italy, South Korea, the United States and elsewhere.
Some 70 per cent of the plane is outsourced, said Richard Tortoriello, an analyst at Standard and Poor’s.

“That creates a potential for more problems to occur than if production is centralized, because quality control can be better managed” in a centralized process, he said

1. Boeing was once an engineering company,

then they adopted the Jack Welchian approach to transforming it into a shareholder company. To do this they had to break the Boeing culture - the one that made quality aircraft with triple back-up systems.
Then, employees were told from day one that their work affected whether or not people would crash and die in their planes. Everyone knew what was at stake.
Now it is all about profits for the shareholder. Lean and mean.

The change in direction for Boeing is documented in the book "Turbulence: Boeing and the State of American Workers and Managers."

There was a reason that Boeing evolved as it did. From day one they were dreaming of the impossible. In the early days, some of the test pilots perished in their maiden flights. That was never far from the minds of those responsible for building every plane that Boeing produced. Workers suffered personally when one of their planes went down.

Now, with outsourcing, the accountability is not as acute and even less so for the executives who made the conscious decision to "save on productions costs." They will always get their huge salaries and bonuses - even though they know little about airplane manufacturing and lots about the Wall Street Shuffle.

The 21-million-U.S.-dollar project will double the size of Boeing Tianjin Composites Co. Ltd., a joint venture between Boeing and the China Aviation Industry Corp. which produces components and parts for the Boeing 737, 747, 767, 777 and the 787 Dreamliner aircraft.

The expansion will increase the venture's composite material production capacity by 60 percent by 2013 and add an extra 300 jobs, bringing the venture's total employment to more than 1,000.

snip

Boeing purchases more than 200 million U.S. dollars worth of products and services every year from China, making it the country's largest buyer of aircraft subassemblies. The company is expected to purchase twice as much by 2015.

Boeing and its related businesses have created about 20,000 jobs in China to date, including 6,000 employees working directly for Boeing, its subsidiaries and joint ventures.

5. Stan Sorscher thinks it's more the business culture than outsourcing per se

The 777 program leaders built in, from the beginning, the engineering problem-solving culture we used successfully on decades of previous programs. Technical leaders could capitalize on trust built through teamwork to allocate sacrifice to some stakeholders, and focus extra resources elsewhere, optimizing on the program overall. This is best done upstream in the course of a program -- assuming you have the decision-making authority, which was intrinsic to the 777 business model.

It's much harder to solve problems downstream, and harder still, if, like on the 787, you have weak decision-making authority and poor understanding of what other stakeholders are doing.

The 777 was built on schedule and delivered on time; it qualified for long-range operations over water at entry into service; it had great dispatch reliability from the beginning; it is currently making customers happy; and is making money for shareholders.

In contrast, the business culture on the 787 program was structured, from the beginning, to skip all those coordination costs. The 787 business model relies much more on suppliers for design and manufacturing. Coordination and problem-solving are relatively weak. Program leaders seem paralyzed when problems come up, because authority for fixing problems is also diffused into the supply chain.

In business school terms, it can be expressed this way. Are airplanes more commodity-like or are they performance-driven products? I can think of my cell phone as commodity-like, and replace it with another brand. I can switch airlines to get from Dallas to Chicago, which makes air travel more commodity-like.

On the other hand, when airline customers pay $100 million for an airplane with a 25 year service life, they expect a reliable, heavily-engineered, performance-driven product.

Commodities might do well in the global supplier business model, regulated by market discipline. To the extent airplanes are more performance-driven, it makes sense to pay higher up-front coordination costs.

7. For those who are too impatient to click on links--

In interviews with The Associated Press, a dozen former Boeing engineers, designers and managers recounted the pressure to meet tight deadlines. Adding to the chaos was the company's never-before-tried plan to build a plane from parts made around the globe.

The former Boeing workers still stand behind the jetliner -- and are proud to have worked on it. But many question whether the rush contributed to a series of problems that led the Federal Aviation Administration last week to take the extraordinary step of grounding the 787. Other countries did the same.

Even before a single bolt was tightened, the Dreamliner was different. Because executives didn't want to risk all of the billions of dollars necessary to build a new commercial aircraft, they came up with a novel, but precarious, solution.

A global network of suppliers would develop, and then build, most of the parts in locations as far away as Germany, Japan and Sweden. Boeing's own employees would manufacture just 35 percent of the plane before assembling the final aircraft at its plant outside Seattle.

8. Anoather analyst disses the beancounter culture at Boeing

This terrifying state of affairs for the Dreamliner, of course, was merely background for Boeing’s fourth quarter earnings call this month. The 787 fiasco wasn’t discussed, except that (a) the investigation was continuing and couldn’t be discussed and (b) 787 production was continuing full speed ahead, despite uncertainties about what needed to be done for the battery system, or any other aspects of the plane’s design. If these planes being built need major retrofit work in the future, well, that’s for the engineers to worry about.

Meanwhile, there was no contrition or soul-searching on the call about how the 787 could have gone this wrong, or what could be done within the company to make it right (once again, 787 program analysis was left to the journalists). Instead, the call emphasized some impressive sales and profit numbers. It was like a farmer showing off a great crop, but not mentioning that the tractor just broke, he fired the mechanic, and outsourced tractor maintenance to Bolivia. And that customers for next year’s crop had been promised penalty payments if the farm didn’t deliver.

Chicago’s view of engineering, as seen in management changes, union negotiations, product launch decisions, and design outsourcing moves, is that it’s a secondary consideration, far behind financial and market considerations such as Return On Net Assets (RONA). But clearly this strategy of downplaying engineering is starting to have a deleterious effect on the company’s financial performance, at least in terms of equities returns relative to the competition. Sure, investors may be scared by the high compensation costs associated with the 787’s woes. But it’s also possible that investors may be getting spooked by a company that seems to lack a proactive approach for dealing with a serious crisis. Even when the 787 gets back to service, it may face further difficulties. There’s also the likelihood that Boeing may be returning to the bad old days of 1998-2003, when it spent next to nothing on new product development.

In other words, Boeing’s problem isn’t just that the engineers have been nudged aside by the bean counters. It’s that the bean counters need to rethink the way they manage the company. Until that changes, investors may continue shifting